Quality will out

The passing of the Pensions Act 2008 means that all employers will have to have a \'qualifying\' workplace pension scheme in situ for their \'eligible\' employees after 2012.

All companies will thus become involved in the process of auto-enrolling their staff into pension saving; including those who don’t want to join a pension scheme, never did and never will. The strange thing is it will be a requirement that employers auto-enrol their eligible employees, but not that such employees should stay auto-enrolled once they’re in the pension scheme.

Pension saving will be voluntary for employees in the new world of pensions. But being auto-enrolled into a pension scheme will be compulsory. If you like you can think of the whole process as ‘voluntary compulsion’.

I want to blow away some of the confusion around Qualifying Workplace Pension Schemes (QWPSs). The new personal accounts scheme will be a QWPS. The idea is that QWPSs will eventually require an annual contribution of 8 per cent of something called ‘qualifying earnings’. But ‘qualifying earnings’ are not the same as actual earnings. In today’s money (from the Pensions Act 2008) qualifying earnings are a band of earnings lying between £5,035 and £33,540 pa.

So, for someone earning exactly the upper band limit of £33,540 pa the maximum that a QWPS would require will be just under 6.8 per cent of total earnings. The government people keep referring to this as 8 per cent, which is confusing, but the reality is that no-one being auto-enrolled into a QWPS will be required to have a total contribution from themselves, their employer and the taxman of more than 6.8 per cent of their earnings.

In fact, and strangely I suppose, the less you earn, the lower the percentage of your actual earnings that will need to be put away for a pension. Someone on £18,000 a year, for instance, will only have a total pension contribution of about 5.8 per cent, someone on £10,000 pa will find their total pension contribution will be just under 4 per cent, while someone on £6,000 a year will only get 1.29 per cent.

At the extreme, someone unlucky enough to be earning £5,036 pa will only get a total contribution of 8 per cent of their ‘qualifying earnings’ of £1 put into their pension pot for that year. That would be eight pence, of course, and would be made up of four pence from the employee, three pence from the employer and one penny from the taxman. The total eight pence annual pension contribution would equate to just less than 0.0016 per cent of actual earnings.

So, no-one need worry about this mythical ‘8 per cent contribution’ we keep reading about. In reality it will never be more than 6.8 per cent of earnings for anybody and could even be as low as 0.0016 per cent for some.

There’s another myth too, concerning the 11 per cent total pension contribution required from the so-called Quality Qualifying Workplace Pensions Schemes (QQWPSs) after 2012.

While all employers will have to offer a Qualifying Workplace Pension Scheme (a QWPS) from 2012 onwards, some employers may choose to offer their employees a sort of GTi version of a QWPS and, if so, the legislation looks like it will let them provide something called a Quality Qualifying Workplace Pension Scheme (a QQWPS). To meet that quality mark a total annual contribution of 11 per cent of ‘qualifying earnings’ will be required, with a minimum of 6 per cent of ‘qualifying earnings’ being provided by the employer.

Achieving this ‘quality’ mark will bring with it significant relaxations in the ongoing auto-enrolment process following 2012, and it will be something that will interest many busy employers; but the 11 per cent total cost may put many off. However, the most that someone on the maximum earnings level of £33,540 would have to have in total contributions would be just under 9.35 per cent of actual earnings. And the minimum employer contribution of 6 per cent of qualifying earnings would never be more than 5.1 per cent of actual earnings.

A 5 per cent employee/5 per cent employer match is not unusual for workplace money-purchase schemes these days, and it doesn’t seem too much of a stretch for such schemes to improve slightly to be classified as QQWPSs in three years’ time. It seems to me that the ‘quality’ mark will be worth having for mid-size employers. The three year period between now and 2012 should not be wasted; there is adequate time for employers and employees to sit down and discuss the best shape for their schemes in the soon to be new world of pensions.